File photo of Jaguar Land Rover plant. JLR sales in the developed markets have been soft lately, which hurts more because these markets are more profitable. Photo: Bloomberg

At first look, Tata Motors Ltd’s results for the September quarter are way better than expectations. Consolidated net profit jumped threefold to Rs2,483 crore, and was about 66% ahead of consensus estimates, according to data compiled by Reuters.

But the results look better than they really should, thanks to a reversal of excise duty on closing inventory held at the end of the June quarter. The excise reversal amounted to Rs535 crore, and boosted reported profit of the domestic business in particular.

The mainstay Jaguar Land Rover (JLR) business reported a better-than-expected Ebitda (earnings before interest, tax, depreciation and amortization) margin of 11.8%, compared to estimates of 9.6% and 10%, respectively, by PhillipCapital Institutional Equities Research and Kotak Institutional Equities.

But again, the beat in earnings was on account of non-operational reasons. Losses on the company’s forex hedges were lower by £111 million compared to the June quarter, while analysts at Kotak, for instance, had estimated forex losses to remain at nearly the same levels.

The lower-than-expected forex losses added about 150 basis points to JLR’s margins, nearly as much as the difference between reported margins and these analysts’ estimates.

Of course, having said all this, there are positives in both the JLR and domestic business.

The luxury car maker’s margins are recovering, albeit gradually. And the lower forex hedge losses themselves are a heartening sign, given the havoc they have caused in the past few quarters. And recent moves in forex rates suggest losses will narrow further.

The domestic business, too, reported a profit at the Ebitda level, even after excluding the impact of the excise reversal. Profitability in the India business improved mostly aided by sales volume (up 13.8%) and cost rationalization measures.

The domestic business has been doing well lately, with replacement demand kicking in for commercial vehicles and the company’s new launches in the passenger vehicle segment doing well.

On the other hand, JLR sales have been a cause of worry. The luxury car maker’s sales in the developed markets have been soft lately, which hurts more because these markets are more profitable. Besides, unfavourable currency movements and high costs weighed on profitability.

And while JLR’s margins recovered from June quarter levels, they are expected to remain under pressure on account of elevated levels of dealer incentives and launch costs associated with new models.

In fact, Tata Motors’ shares have underperformed the BSE Auto index by a huge margin this year for this reason, apart from the pressure on margins. The shares have dropped 6% this year, while the auto index has risen by more than 24% so far this year.